F&N takes preemptive move to beat sugar sin tax

KUCHING: In anticipating a 10 per cent sugar sin tax to be implemented eventually in Malaysia, food and beverage (F&B) player Fraser and Neave Bhd (F&N) has been pre-emptively preparing to beat the implications the new tax is expected to bring.

Following a meeting between F&N’s management and the research arm of TA Holdings Bhd (TA Research), F&N said it has been continuously working on reducing its sugar index levels of its beverages.

“F&N’s sugar index level has been decreasing at an average rate of 2.6 per cent year over year (y-o-y) in the last 10 years. This could lessen the negative impact arising from the sugar sin tax,” shared the research arm in a note yesterday.

An experiment conducted by the Mexican National Institute of Public Health also highlighted a key implication of a 10 per cent sugar sin tax which was a reduction of sweetened beverage sales across the country by 6 per cent over the course of two years.

Despite this strategic move to reduce the effect of volatility in sugar prices and tax to its profit margins, F&N’s management is still cautious on its negative impact on their earnings.

Moreover, F&N is expected to face added pressure from the increasing sugar prices as sugar prices resumed its uptrend since December of last year. Currently, sugar is trading at around US$0.206 per pound which is 13.2 per cent higher than the average sugar price of US$0.182 per pound in 2016.

TA Securities expects this trend to continue escalating as sugar experts have noted that unfavourable weather has caused out to fall behind demand.

However, they do not expect a sharp contraction in the soft drink segment’s profit margin in the coming year as historically, F&B industry players have increased soft prices to pass on the cost pressure to consumers instead.

Similarly, to combat the anticipated reduced sweetened beverage sales, the research arm expects F&B companies such as F&N to increase product prices further to buffer the drop-in sale volume effect in order to keep profit margins constant.

Looking towards F&N’s diaries business, TA Research notes that its diary segment has witnessed steady growth at an average yearly growth of 6 per cent since 2012 and is expected to continue on into FY17, producing similar revenue.

“In Malaysia, the revenue growth is driven by favourable global milk- base commodity prices and improvement in operational efficiencies. On the other hand, F&N’s revenue growth in Thailand will be anchored by its effective branding and consumer trade programmes,” explained the research arm.

Furthermore, there is an expected first full-year contribution of RM70 million from F&N’s new UHT lines in its Sarawak plant and new evaporated milk processing and packaging line in Rojana.

“Margin wise, we expect the higher dollar sales from F&N’s Thailand unit and higher operating efficiencies to more than offset pressure from a weak Ringgit and allow further improvement to the group’s diary margin,” concluded the research arm.

Despite these optimistic views, the research arm will continue maintain its ‘Sell’ valuation and a lower target price of RM21.63 per share on the stock as they believe current valuation is running ahead of the group’s fundamentals.